GST Audit

Types of GST Audit

There are three types of GST Audits in India.

1. Mandatory Statutory Audit (Aggregate Turnover > ₹2 Crore)- REMOVED

Section 35(5) of the Central Goods and Services Tax (CGST) Act previously mandated that any registered taxpayer whose aggregate turnover exceeded ₹ two crore in a financial year had to have their accounts audited by a Chartered Accountant (CA) or Cost Accountant (CMA).

However, in 2021, Section 35(5) of the CGST Act, 2017 was amended, and it removed the statutory audit requirement under Section 35(5) of the CGST Act, 2017. Vide notification no. 9/2021–Central Tax dated 30.07.2021, the mandatory statutory requirement is replaced by a self-certified Form GSTR-9C.

GST-9C:

• The form is mandatory for the taxpayers whose aggregate turnover exceeds ₹5 crores in a final year
• It must be prepared by a certified auditor
• It must be filed by 31 December following the financial year online on the GST portal.

Consequences of Non-Compliance:

• Failure to file GSTR‑9C on time may result in late fees of ₹25 per day per act (CGST & SGST), capped at 0.25% of turnover.

2. Departmental Audit under Section 65 of the CGST Act, 2017

It is an official examination of a taxpayer’s financial and tax records. It is conducted under Section 65 of the CGST Act, 2017. A departmental audit is conducted when:

• There are inconsistencies in GST returns, such as a mismatch between GSTR-1 and GSTR-3B.
• Tax authorities flag suspicious transactions, high ITC, or unreported income
• Risk-based selection of taxpayers by the GSTN (Goods and Services Tax Network) through automated data analytics
• Complaints/investigations

Audit Initiation Process

Step 1: Prior Notice

The GST officer issues Form GST ADT-01, in which they give at least 15 working days’ notice before starting the audit.

Step 2: Timeframe

The audit must be completed within 3 months from the date of commencement. The Audit can be extended to 6 months with the prior approval from the Commissioner.

Step 3: On-site or Off-site

The audit may be conducted at the registered person's place of business or in the department’s office.

Step 4: Document Verification

Officers verify returns filed, such as GSTR-1, 3B, 9, etc., tax payments, ITC claims, e-invoices, books of account, and other relevant records.

Step 5: Final Audit Report

Once the audit is done, a summary of observations and findings is issued in Form GST ADT-02. If discrepancies are found, the officer may initiate proceedings under Section 73 (non-fraud) or Section 74 (fraud) of the CGST Act, 2017.

Consequences of Discrepancies Found

If discrepancies are found after the audit, the taxpayer may receive a Show Cause Notice (SCN) under:

• Section 73 - for non-fraudulent discrepancies (lower penalty)
• Section 74 - for fraudulent suppression, evasion (higher penalty, up to 100%)

• Additional tax, interest, and penalties may be demanded
• In serious cases, prosecution or cancellation of registration can follow

3. Special Audit under Section 66 of the CGST Act, 2017

A special audit is a deep, expert-driven scrutiny of the accounts and turnover of the registered taxpayer. It is initiated by the Assistant Commissioner with the prior approval from the Commissioner when:

• The value of supply declared by the taxpayer is not correct, or
• The input tax credit (ITC) claimed is not in accordance with the law, or
• The case involves complexity that requires expert examination.

Audit Initiation Process

Step 1: Appointment of Auditor

The Commissioner nominates a Chartered Accountant (CA) or a Cost Accountant (CMA) to conduct the Special Audit. The taxpayer has no authority to choose their own auditor.

Step 2: Prior Notice

The GST officer will issue a direction in the Form GST ADT-03 to the taxable person.

Step 3: Timeframe

The audit must be completed within 90 days from the date of commencement. The audit can be extended to 90 days on the request of the taxpayer or the Chartered Accountant.

Step 5: Conduct of Audit

The nominated CA/CMA conducts the audit by reviewing:

• GST returns
• Books of accounts
• ITC claims
• Invoices, payments, and financial statements
• Any other relevant documents

Step 6: Submission of Audit Report

• The CA/CMA submits a detailed audit report to the tax officer who ordered the audit. This report includes observations, findings, and any discrepancies detected.

Consequences of Discrepancies Found

If the audit report reveals discrepancies or non-compliance, the  officer may initiate proceedings under:

• Section 73 of the CGST Act, 2017, for non-fraudulent issues (e.g., unintentional errors)
• Section 74 of the CGST Act, 2017, for fraudulent activities, evasion, or suppression of facts

4. Voluntary GST Audits

A Voluntary Audit refers to a situation where a taxpayer voluntarily conducts a self-review or audit of their own GST records and compliance, without being directed by the GST authorities. Even though the statutory GST audit is no longer mandatory, many companies, especially large or multi-location businesses, continue to perform voluntary GST audits internally or through external professionals to:

• Ensure correct tax payment and Input Tax Credit (ITC) claims
• Detect errors or mismatches before being caught in scrutiny or audit
• Prepare for possible departmental audits or investigations
• Avoid penalties, interest, and litigation
• Improve internal controls and documentation